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Hydrogen: Hope or Hype?

There have been two interesting editorials in The State in the past week about the potential impact of hydrogen energy on the South Carolina economy.

First, David Doty wrote in Hydrogen’s slow lane to reality that, "It is unfortunate that the mayor of Columbia and several influential professors at USC have been snookered into believing there is a future in hydrogen fuel cells." At least you can't fault him for beating around the bush. His basic argument is that "Even with today's high fuel prices, unsubsidized hydrogen gas for the small industrial user is still 30 times more expensive per unit of energy than gasoline."

So this week Larry Wilson and Harris Pastides, founders of the Next Energy initiative, returned fire in Hydrogen’s near future, "Today our state is in a unique position to address America’s future energy needs from our own backyard. As with any new technology, there will be critics and some who, fearful of change, hold firm to the status quo... Billions of dollars are being invested across the world by companies and governments to lower the cost of these technologies and bring them to market in the next decade... We need to focus on the technology in which we already have a competitive advantage, and in Columbia that is fuel cells... Our Midlands-based organizations pledge to partner productively with the other outstanding assets that South Carolina has, including the Savannah River National Lab, the Center for Hydrogen Research, S.C. State and Clemson’s International Center for Automotive Research."

So on the one hand, Larry and Harris argue we ought to pursue an opportunity where we seem we have a strategic advantage. But, as David points out, the problem is that compared to mature energy systems, this new alternative is not cost competitive. What should we do?

Well, Larry and Harris actually touched on the key to this dilemma - The Innovator's Dilemma. They note that, "The president of a leading computer manufacturer in the ’70s said he could not see a need for computers in homes." Why is it that leaders in the computer industry could not see the potential of PCs, and what lesson should we learn from them to make money in hydrogen?

The customers' of the leading computer manufacturers in the 1970s were corporate CIOs. Computer manufacturers had more data about what these customers wanted than anyone, and they were constantly seeking ways to deliver more value to their most profitable customers. The PC did not add much value to these large customers in the late 1970s, so the leading computer manufacturers didn't pay PCs much attention.

At the same time that the computer manufacturer was calling on corporate CIOs, the guy running the coffee shop across the street was closing his books manually. All the IT solutions available to him were too complicated, too expensive, or too inconvenient. Then along came a new personal computer and the first killer application, the Visicalc spreadsheet. The CIO still didn't want it. Costs per unit of computing for PCs were astronomical compared to mature systems. Plus, supporting thousands of PCs and training all the people that needed to use them would be a nightmare. But the guy in the coffee shop thought it was great. The cost of the PC was cheap compared to his alternative, and he eagerly adopted a new technology that made it easier for him to close his books and get home 30 minutes earlier each night.

So the key to commercializing PCs was not to look at existing major customers. They had mature, cost-effective solutions, and when the attempt was made by IBM and others to cram PCs early into this market it failed. But by focusing on a customer who was not well served by the status quo, one who was looking for a simpler, cheaper, more convenient solution to a problem he had, the PC market exploded.

So David is probably right. If we try to commercialize hydrogen alternatives by cramming this technology initially into markets with mature, cost effective energy solutions, the attempt will almost certainly fail. But what David misses is that there are low end customers with fuel related problems they are looking to solve.

Here's an example. A Danish firm has introduced the H2 Truck. The initial target market is "internal transportation in industries, warehouses, hospitals, airports and other applications with a need for non-polluting light transport." Compared to cars and trucks, this market is peanuts. But like the guy in the coffee shop buying the PC, these users may be willing to pay a high unit cost for a form of energy that solves an even bigger problem they have, indoor pollution.

And as the emerging technology gets into the marketplace, it will mature and the cost will come down. And when it is mature enough, it might even displace the leading solution in the market place for cars and trucks. The start-up that commercializes the technology may have such an inherent advantage in technical knowledge and cost efficiency over the prior market leader that the upstart's lead may be almost insurmountable. Ask IBM.

So, like Larry and Harris said, there is enormous potential in hydrogen energy. But there is also enormous risk. If we try to compete initially with mature, cost effective solutions, like IBM did with PCs, we are likely to lose a lot of money, which is what David is concerned about. But if we are smart about, like Bill Gates was, and we initially target customers that look small and less profitable to the market leader, but who have problems that demand simpler, cheaper, more convenient solutions, there is no reason that the Microsoft of hydrogen energy couldn't be headquartered in South Carolina.

If we are smart about it.

(Note: You can find more examples of the Innovator's Dilemma in Swamp Fox Insights: Innovation and Entrepreneurship in a Time of Profound Change.)